Energy production is a capital intensive business, however having downstream integration in place, SSE can manage risks and maximize profits throughout the energy value chain. Notwithstanding this, it is also exposed to multiple risks, including barrier to exit from the energy production due to higher fixed cost and net gearing. In the event of the sudden loss of retail customers or drop in energy demand, ROCE could fall significantly.
Falling aggregate demand without any significant drop in retail customers is more likely to happen, because of the grid parity due to PV technology. Additionally, regulatory pressure to curb monopolistic behaviour of a big six cartel could further impact on SSE’s financial performance.
Strategically, it is advisable for SSE to stop investing further in energy production capacity and management should support geographical diversification of its retail customer base. Simultaneously, the protection of market share should be channelled by promoting bundled services. A ‘Price freeze’ offer for next few years is a useful tool to compete against growing independent energy retailers. By securing the retail customer base with price freeze offers, more certainty could be established in the hedging of fuel commodities and currencies.